An HO-6 policy is the form used for a condominium insurance policy. This condo policy will provide for coverage on the interior walls, interior upgrades, and for personal property held within the dwelling.
How does this apply to mortgage finance? In 24 years of mortgage banking, I have never even heard of HO6 insurance. And that is because when underwriting a condo loan, the banks only cared to see that the dwelling was insured in case of damage. And in a condo, part of condo fees go towards the master umbrella policy, so the unit owner usually does not concern himself with getting dwelling coverage, because the master policy covers the reconstruction of their unit. But now, banks have new HO6 rules. This changed in the middle of 2009, and I have done 30-40 condo loans since then, and am just finding out now!
Fannie Mae now requires that lenders verify that hazard insurance for all condominium projects covers fixtures, equipment, and other personal property inside individual units. The updated underwriting policy now requires that the borrower obtain a "walls-in" coverage policy (also known as an HO-6 policy) unless the lender can document that the master policy provides the same interior unit coverage. The master policy must include replacement of improvements and betterment coverage to cover any improvements that the borrower may have made to the unit. The HO-6 insurance policy must provide coverage in an amount that is no less than 20 percent of the condominium unit's appraised value.
So Fannie Mae, in changing this rule, is forcing condo owners to absorb some of the financial/insurance risk. Maybe this is a wise move for condo owners? It may be especially good for condo owners who have done extensive interior renovations, and would never get their unit rebuilt to the level they renovated it to, if they solely relied on the master condo policy. So maybe its good news for the consumer? Maybe its passing the insurance buck to the consumer?
All I know is that I have done all those condo loans I mentioned, since the middle of 2009, and no one brought it up until now! Maybe that is a good thing for all those prior condo loans I did?
The loan I am trying to get approved now is going to get more expensive for the consumer, because I now have to tell him to go out and spend money on an HO6 policy. But in defense of Fannie Mae and the banking industry, the consumer will also be better protected.
Tags: condo, condo insurance, condo loan
Who are the vendors that market insurance for the condo sector?
Hello Joel, most major insurance providers will write this type of insurance, for example State Farm, AllState, Geico, USAA, etc. If you want to consider insurance of this type call any of the above, or call the current insurance provider that you may have a "contents coverage" policy with. The contents coverage covers your personal belongings against damage or theft, the HO6 would be good to consider in addition, especially if you have done a renovation. I myself own a condo, and did an extensive renovation. The insurance provider that covers the dwelling (that the condo's board of directors choose and part of my condo fee pays for) says that part of the master policy's coverage will go towards rebuilding the interior of my unit, however that this coverage is basic and not extensive.
That master policy would end up rebuilding walls, replacing windows, and basic cabinets and fixtures. But I have installed more expensive fixtures, cabinets, flooring, etc. So I chose to get this additional HO6 coverage to cover the cost that I think it would take to redo my place to its current level of finish.
As a condo owner, I've always had HO6 coverage. I'm happy to provide my lender with proof of coverage, but get this:
I just refinanced and (at closing) found out that my lender will be added to my HO6 policy. This gives them the right to collect and distribute funds from any claim!
Lender says this is a governmental regualtion, but I don't buy it. Have you come across this?
First, we all need to realize that in some cases HO6 coverage is a good idea. In many condos the master insurance policy will cover only common areas such as the hallways, roof, basement, elevator, and common walkways, but not the inside of the units. Hence the nickname of this policy being "walls-in" coverage". But I have not heard of a lender requiring that they be added to the policy so that they can collect and distribute funds. If they say its a government regulation, I suggest you demand they show you a copy of this regulation to support their claim.
Hello Dana, FHA (or Conventional) will indeed require this HO-6 cost to be built into the debt ratios. It is a recurring cost, as such it will have to be built in as a debt. Let me know if you have any other questions, and thanks for the inquiry. Brian.
If you do not have any betterments or improvements to your condo, for a refinance are you still required to get the additional H06 coverage even if your master policy does include your interior (up to and including everything that is original)?
If so, where is the benefit to the borrower that is being required to do this? Aren't they essentially paying hundreds of dollars for coverage that they don't need and won't provide any value to them (on top of what is already covered by the master policy)?
Then, on the other hand if your master policy does include your interior but not betterments or improvements, and you have made improvements, shouldn't you only need coverage for the value of your improvement, over the value of the original. I don't know why you would still need 20% of the appraised value…
They still require the HO6 if you have no betterments or improvements. Fannie Mae would tell you they do not view it as "additional H06 coverage", they see it as "proper H06 coverage". In other words, they think they are making everyone raise their coverage to protect themselves, as well as the lender, better. I think the point is debatable on a case by case basis. I recently saw a client who had $15,000 of coverage for interior items on a $400,000 condo. The requirement of 20% coverage would require $80,000 in interior coverage for this unit. The owner wanted to leave the $15,000 intact, which was clearly insufficient. Was $80,000 too much? I don't know, I'd need to see the unit. The bottom line is that you can raise the coverage to get the loan through, and you can opt to reduce it after settlement later. But if you suffer a major loss, you could really be in for a major expense, all just to save a few hundred a month. I am not a fan of the arbitrary nature of how Fannie Mae has determined the 20% coverage requirement, but I do believe there are many under-insured condos out there, related to their interior finish and appliances.
Still not sure I follow.
If I have not improved anything, and my Master policy covers my interior to the original quality, what is the H06 going to cover in addition to the master policy?
Without the additional coverage, my condo's floors, countertops, walls, etc are going to be replaced with the same quality that was originally installed. Since I haven't improved anything, that means everything will be replaced with the exact same quality as currently there.
So hw is this "proper H06 coverage" any better than a master policy that covers the interior when there are no improvements?
Thanks!
If your Master Policy covers all of your interior items, you would not be required to get HO6.
But most Master Policies do not cover 100% of the existing interior items, I have yet to see one.
If yours does, then you will be fine.
Thanks for the response. Here is how my policy reads "The master policy provides coverage for the interior of units as they were originally
conveyed by the developer." Don't know if there is a way to get more details or not.
I have shown this to the lender and stated that there have been no improvements, but they say Fannie Mae is still going to require the additional coverage…
The lender may require something that says, "guaranteed replacement cost policy".
Having a policy that says, “The master policy provides coverage for the interior of units as they were originally
conveyed by the developer" may be too vague for the lender.
The bottom line is that you can raise it, and then drop it after settlement.
I want to buy a FNMA condo but listing agent cannot seem to tell me whether or not there is a master ins. policy in place (total of 8 units, 5 being owned by one person, the other 2 owned but rented). How do I find out if there is a master ins. policy and would FNMA sell a condo that did not have one in place? Also do not know if there is even an active association in place. Really want this place but don't want to get into a potential future nightmare either. Thanks
Hello Jane, FNMA would never do a loan without a master insurance policy. But, you have bigger problems. With one investor owning 5 of 8 units, no one will ever do a loan on that building. Fannie Mae and Freddie Mac say that one owner cannot own more than 10% of a condo building. There is no yielding on that rule, so that building is not able to get financing at all. The seller will have to sell that unit to an all cash buyer. Sorry there is not better news.
We are in the same position as Jane (#12): No loan without a master policy. It's a 4-unit condo complex. 2 have been sold to separate cash buyers and 2 are still available. Couldn't we look into a non-conforming loan?
Hello Tracey, there really are no more "non-conforming" loans for condos. No one wants to take the risk. The loan either needs to fit Fannie Mae & Freddie Mac guidelines, or there is no alternative. The last 2 loans will have to be all cash offers also. Or, you'll have to work with the current 2 owners, and get the Master Insurance policy setup, and put anything else in place the condo may need, to pass Fannie/Freddie scrutiny.
i am actively pursuing the purchase of a condotel.
it has come to my attention that fnma/frmc will no longer underwrite a condo tel. if that is the case, the HO6 requirement becomes mute, correct?
i'm undecided as to paying cash or financing at this time.
Hello David, yes, getting a Condotel loan through is difficult to impossible. I have one source that will consider a condotel loan in CA, and that is it. They want a large down payment, like 40% or 50% down. But if you do pay cash, you are correct, the HO6 requirement goes away. Although, I'd still get some coverage, to be safe.
Thank you so much Brain for your great insight on this topic. You have provided excellent clarity on Ho6 insurance.
Here is my situation: I am in the process of closing refinancing my condo. Loan is approved & i submitted all the documents including master insurance policy (HoA) & existing Home owner insurance policy(HO6) 3 weeks back.
Last week just about to sign for closing papers, lender is insisting me to provide proof of insurance of Ho6 with 20% coverage (dwelling).
I check with my insurance company. They told me that (condo) Ho6 will not cover Dwelling coverage. Now my lender told me to add optional coverage ‘'owners addition & alterations' to 20% refinance value instead of dwelling coverage. This will add few thousand dollars of premium to me over period of 15 years of loan. Makes my refinance not a viable option. I told my lender that I am not going increase my Ho6 “owners addition& alterations’ coverage to 20% of refinance value.
Can you pls. clarify : Is ‘owners addition & alterations’ coverage same as dwelling coverage ? My loan processer has no idea on what is talking about.
If my HoA insurance policy ( master insurance policy) has dwelling coverage 20% of refinance value , Is it mandatory to have another 20% ‘owners addition & alterations” coverage through Ho6 . By the way my condo is 2 story & reside in California state. Thanks in advance.
Hello, dwelling coverage is not the same as HO6. HO6 is also called "walls in" coverage, which means it covers your upgrades, finish items, fixtures, etc. All that the master insurance usually covers is the dwelling (i.e. the building) and the systems, not your interior finish items. This is why Fannie Mae wants the HO6, so that the consumer is better covered in case of a total loss. So if you have proper dwelling coverage, and no HO6 (or walls-in) then you will need to comply with the lender's request. It is very rare to find a master policy that has any HO6/walls-in coverage.
I don't see that you HO6 policy has any "walls-in" coverage. I think you may just have some basic coverage, with no walls-in, which is why the lender is asking for more.
I'd take yourself out of the middle of it, have your insurer call your lender directly, and have them clarify things with each other.
Brian, you said "you can raise the coverage to get the loan through, and you can opt to reduce it after settlement later". How can you do that? What allows you to reduce it later if you're obligated by the loan documents to insure 20% of the unit's appraised value?
You are not obligated to maintain the 20% coverage forever, it needs to be in place at settlement. Unless the lender is forcing you to escrow for it, after settlement, you can alter it. It's the same concept as signing loan docs that say you are going to be an owner occupant, but then a few months later a work relocation, change of heart or financial circumstances forces you to rent the place and live elsewhere as your primary residence. However, many people that drop their coverage later are likely under-insured in case of a major loss.
Brian, if a mortgage for a condo was originated in 2003 and is owned by Fannie Mae can the Servicer or Fannie Mae now require you obtain an HO-6 policy? It was not required at time of closing in 2003. Is this a retro active policy?
Hello Todd, no, these policies are not retroactive. They are effective for all new loans only. So if you purchase a condo, the new HO6 rules apply, and if you refinance an old loan, no matter when it was originated, the new HO6 rules apply.
I was wondering if you can get the policy for one year until you have completed the loan and then forget about it, or even after you've signed the loan, cancel the policy. I don't need it, I'm forced to do it because of the new regulations.
Can that be done ??
Hello Sal, yes, I have had people get an HO6 policy to satisfy the lender, only to cancel it later. But realize you are likely leaving yourself under insured if you do so.
Hi Brian
Thanks for getting back to me so fast. Yes I do realize but I have never had a claim in my life of any kind.
I'm just the average Joe, going to my job back an forth so…. Never been in an accident or had any trouble. I think it's a waste of money on my part .
Yes, but realize if there is a total loss, by fire for example, you will likely be exposed to some losses.
Brian – I am in the process of a refi and just found out about this requirement. This posting has been very helpful. We already have HO6 coverage, but are told it is not enough. The required $158,000 of building property insurance seems really high. There is only so much flooring, shelving, light fixtures, etc., that you can put into a 1,300 sq ft condo over and above what the original building plan provides. I spoke to our agent who says that this is the highest requirement they have seen. It would also increase our homeowners insurance by 33%. We still make up the increased cost of insurance with the lower interest rate, but it seems really unnecessary and will definitely try to reduce it after closing.
I am glad you found the post helpful. I am in the same scenario on my own condo. I find the coverage excessive, but only slightly so. I did a major renovation on my place, and although I am probably covered in excess of what I need, it helps me sleep at night knowing I have no worries. My HO6 costs me about $400 annually, and maybe $50-$100 of it is not needed. But, I don't know for sure, labor can be very expensive, and as I said, it helps me sleep at night. You can make an adjustment after settlement, but think it through carefully.